Koch brothers’ quiet play: Oil sands

The biggest lease owner in Canada’s oil sands isn’t one of the well-known international oil giants. It’s a subsidiary of Koch Industries, the privately owned cornerstone of the fortune of conservative Koch brothers Charles and David.

The Koch Industries subsidiary holds leases on 1.1 million acres – an area nearly the size of Delaware – in the oil sands region of Alberta, Canada, according to an activist group that studied Alberta provincial records. The Washington Post confirmed the group’s findings with Alberta Energy, the provincial government’s ministry of energy. Separately, industry sources familiar with oil sands leases said Koch’s holdings could be closer to 2 million acres.

The companies with the next-biggest net acreage positions in oil sands leases are ConocoPhillips and Shell, both close behind.

What is Koch Industries doing there? The company wouldn’t comment on its holdings or strategy, but it appears to be a long-term investment that could produce tens of thousands of barrels of the region’s thick brand of crude oil in the next three years and perhaps hundreds of thousands of barrels later.

The finding about the Koch acreage is likely to inflame the contentious debate about the Keystone XL Pipeline and spur activists and environmentalists seeking to slow or stop planned expansions of production from the northern Alberta oil sands, or tar sands. Environmental groups have made opposition to the pipeline their leading cause this spring, and Senate Majority Leader Harry Reid of Nevada has called Charles and David Koch “un-American” and “shadowy billionaires.”

The link between Koch Industries and Keystone XL is, however, indirect at best. Koch’s oil production in northern Alberta is “negligible,” according to industry sources and quarterly publications of the provincial government. Moreover, Koch has not reserved any space in the Keystone XL pipeline, a process that usually takes place before a pipeline is built. The pipeline also does not run anywhere near Koch’s refining facilities. And TransCanada, owner of the Keystone routes, says Koch is not expected to be one of the pipeline’s customers.

Still, the activist group that is publicizing the figures about Koch holdings in the oil sands – the International Forum on Globalization – is arguing that Koch will benefit indirectly. The IFG contends that the Keystone XL pipeline will create competition among rail and other pipelines and lower transportation costs for all oil sands producers, bolstering profit margins and making additional reserves economically viable.

“The biggest way Koch could benefit from Keystone is by the pipeline’s acting as the ‘keystone’ of oil industry strategy to increase the ‘takeaway’ capacity for producers of Canadian crude, thereby getting more oil to more lucrative markets, and ending the deep discounts on Canadian crude currently glutting markets,” said IFG’s Victor Menotti.

This new report is the second that IFG has issued in six months about Koch Industries and the oil sands. In October, IFG said Koch owned 2 million acres in the oil sands; it lowered its estimate after obtaining the Alberta provincial government’s mineral lease records.

Koch is not generally known as a major stakeholder in the oil sands where the major players have been the likes of Royal Dutch Shell, ConocoPhillips, Exxon Mobil and Chevron. Chinese companies have about a 5 percent stake in current production, according to a report by IHS CERA.

Suzanne Bayley, a biological sciences professor at the University of Alberta who studies the oil sands, said she was surprised to learn of the Kochs’ holdings, calling them “significant” given that the total leased area in the region amounted to 35 million acres.

The IFG report says that Koch has 299 oil sands mineral leases purchased – and in some cases, as long ago as 2002. The provincial government’s Alberta Energy said Wednesday, “We confirm that Koch Oil Sands Operating ULC is the Designated Representative of 298 Alberta Crown Oil Sands leases covering approximately 455,000 hectares (1.1 million acres).”

The size of oil sands lease holdings is politically loaded, which is why it drew the attention of the IFG, a left-leaning think tank with roots opposing the North American Free Trade Agreement and the World Trade Organization.

In its earlier report, “The Billionaires’ Carbon Bomb,” the IFG said that “because of the Keystone XL Pipeline, the Kochs could make an additional $100 billion in profits from their production operations alone.” The group, using rough estimates, assumed $15 a barrel in additional profit on 6 billion barrels of reserves that would become economically recoverable.

The IFG estimate is open to debate. Many of the leases held by Koch were bought before the Keystone XL pipeline was even proposed and were presumably economically viable without it, and at much lower oil prices. Moreover, the IFG’s first report used higher acreage estimates. But Menotti says that the smaller figure, “although it may not be as much acreage as some reports estimated they might have, it is still over 1 million acres and worth tens of billions of dollars.”

Another key assumption underlying the IFG argument is that if Keystone XL is not built, then oil sand reserves will be stranded. That’s different from the conclusions in the recent State Department environmental impact statement, which said that rail expansion or other pipelines would enable oil sands development to continue unimpeded.

Although Koch’s oil sands production is “negligible,” the company has been actively developing its properties and has made requests for permits for new production. In a 2012 offering to sell a portion of its lease holdings, Koch said it had drilled more than 100 wells and done seismic work to delineate its resources.

Koch has a big oil terminal operation east of Edmonton at Hardisty, the starting point for Keystone XL and other pipelines. Koch’s Flint Hills subsidiary has a refinery in Pine Bend, Minn., that has long processed large volumes of diluted bitumen from the Canadian oil sands. The Canadian Association of Petroleum Producers said that Koch takes oil sands crude off the Enbridge pipeline system in the United States and carries it through the company’s own Minnesota Pipeline to the Flint Hills refinery.

Most of Koch’s Alberta leases appear to be in the Peace River area, west of the major developments in the Athabasca River area. The Peace River area will be exploited using steam injection and not the big, unsightly open pits common in the Athabasca development. But steam extraction is still energy intensive and emits more greenhouse gas emissions than conventional oil drilling.

“It involves fragmenting the landscape with roads, well pads and pipelines,” Bayley said.

In Alberta, oil sands production today runs about 2 million barrels a day, and Alberta Energy says production could rise to 3.8 million barrels a day by 2022.

The Canadian Association of Petroleum Producers says Koch filed an application in February 2013 with the Alberta Energy Regulator to develop two steam-assisted projects, each producing 30,000 barrels a day. Pending approval, construction will start in the fourth quarter of 2016, and production would begin two years later.